Updated with comments from Pepper Hamilton attorney Frank Mayer.
NEW YORK (
) -- Home flippers beware: Federal bank regulators are getting tough on appraisal requirements for properties that are quickly resold.
As required under the Dodd-Frank banking reform legislation, federal regulators -- including the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Consumer Financial Protection Bureau -- proposed a strict set of appraisal requirements for "higher-risk" mortgages.
The "higher-risk mortgages" subject to the new appraisal rules are loans with rates that are:
- 1.5 or more percentage points higher than "the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set," for a first-lien loans with balances not exceeding 80% of the home's value, for a one-to-four family dwelling, with some exceptions.
- 2.5 or more percentage points higher than the APOR for a first-lien loans with balances exceeding 80% of the home's value.
- 3.5 or more percentage points higher than the APOR for a second-lien mortgage loan, or for a reverse mortgage.
The new rules exclude "qualified mortgages," which are mortgage loans that conform to the rules of
, allowing the lenders to quickly sell new loans to one of the government-sponsored mortgage giants.
The changes to Regulation Z -- which implements the Truth In Lending Act -- require lenders who accept applications for higher-risk mortgages to require a "a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property." During the real estate bubble, many lenders relied on market value estimates when extending mortgage credit, rather than an actual appraisal.
The lender will also be required to obtain a second written appraisal, "at no cost to the borrower," if the new loan "will finance the acquisition of the consumer's principal dwelling," or if the loan will "finance the purchase or acquisition of the mortgaged property from a seller within 180 days of the purchase or acquisition of such property by the seller at a price that was lower than the current sale price of the property."
So in the case of a quick flip by the seller, the lender must pay for a second full appraisal from a different appraiser, that "must include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale." Not only does this create significant additional cost for the lender, it puts a serious amount of responsibility on the second appraiser.
The regulators said that the requirement of a second appraisal "is consistent with regulations promulgated by
the Department of Housing and Urban Development to address property flipping in single-family mortgage insurance programs" of the Federal Housing Administration. Under the FHA's Anti-Flipping Rule, "properties that have been resold within certain recent time periods are ineligible as security for FHA-insured mortgage financing."
The regulators also proposed requiring the second appraisal if "the consumer is acquiring the home for a higher price than the seller paid," which would, of course, cover the requirement for homes being flipped within 180 days of the seller's purchase, however, the regulators took a soft approach on this requirement, saying "comment is requested on whether a threshold price increase would be appropriate."
Required second appraisals must include "an analysis of the difference in sale prices," taking "changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale," into account.
Public comments will be accepted by the regulators until October 15.
Over the long haul, the requirements on second appraisals for the higher-risk mortgages, could save lenders from themselves.
Bank of America
reported a 41% increase in total mortgage repurchase claims against the company, to $22.7 billion as of June 30 from $16.1 billion the previous quarter. Most of the claims involved loans issued by Countrywide, before that lender was acquired by Bank of America in 2008.
Putback claims from Fannie and Freddie made up 53% of outstanding claims against Bank of America, and repurchase demands from private investors increased to $8.6 billion at the end of the second quarter, from $4.9 billion in march. Bank of America said in an earlier filing that mortgage-backed securities litigation against the company "generally involve allegations of false and misleading statements regarding... the process by which the properties that served as collateral for the mortgage loans underlying the MBS were appraised."
Frank Mayer -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP, in the firm's Philadelphia office -- says the proposed appraisal rules "would cover all creditors that extend higher-risk mortgage loans, not just the 'federally related transactions' that are currently covered by the appraisal regs."
Mayer also says because "the proposed rule would include all charges (i.e., additional creditor and 3rd party charges) in the calculation of the finance charge," more loans will probably be brought "within the parameters of the higher-risk definition and, therefore, subject them to the greater regulatory burdens."
"I would expect a good deal of comment on the metric used to cover loans subject to the new burdens."
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.